Purchasing power parity in LDCs: An empirical investigation

Using the real effective exchange rate (REER) data of sixty-six developing countries and a more extensive monthly dataset from 1980:1 through 2009:10 (i.e., 358 observations), this study examines whether the REER is stationary, using two approaches. The two tests are the KPSS and the KSS test. In contrast to previous studies, we found overwhelming support for the long-run purchasing power parity (PPP) hypothesis; thus, the PPP is a suitable guide for exchange rate determination and exchange rate policy reform in LDCs. We attribute our finding to using REER data as well as linear and nonlinear tests with different null hypotheses.